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How to Qualify for an FHA Loan

Many people think that FHA mortgage loans are only for first time homebuyers. Although FHA loans can be a great option for first time homebuyers, they can be used for many other purposes. Knowing the benefits and drawbacks as well as requirements to qualify for an FHA loan may help you on your next home purchase.

About FHA Loans

FHA loans are insured by the Federal Housing Administration, a government agency run through the Department of Housing and Urban Development (HUD). Though FHA loans are insured by the government, Uncle Sam is not actually the one doing the lending. You can obtain FHA loans through private lenders and large banking institutions nationwide.

How to Qualify for an FHA Loan

You do not have to be a first time homebuyer to obtain an FHA loan. That said, you can only have one FHA loan at a time; FHA loans can only be made on owner-occupied properties.

As of 2010, the minimum required down payment for FHA loans is 3.5%. This is much more appealing and reasonable to people who cannot afford to put down 20% for a conventional loan. Another requirement to obtain an FHA loan is decent credit; typically a credit score of 620 or above, depending on the lender.

Types of FHA Loans

Lenders offer a variety of FHA loans in addition to the most common type, the 30 year fixed interest. You can also get a fixed interest rate on an FHA loan for 10, 15, 20 or 25 years or you can get an adjustable rate FHA loan. An adjustable rate loan allows for the fluctuation of interest rates at certain periods of time. For example, a 3/1 adjustable rate FHA loan means the interest rate is fixed for 3 years and can adjust every year thereafter. FHA adjustable loans come in the form of a 3/1, 5/1, 7/1 or 10/1 with 30 year terms. These are not as popular as fixed interest FHA loans since they provide more risk to the average homebuyer.

The main drawback of getting an FHA loan is the mandatory private mortgage insurance (PMI). PMI is a monthly payment that the borrower must make to help protect lenders from the risk of default. PMI is required for those who put less than a 20% down payment on a home with an FHA loan and can cost several hundred dollars every month. According to the Department of Housing and Urban Development, the borrower must pay monthly PMI until he or she has owned the home for at least five years and has reduced the principal of the loan to 78% or less of the original balance.

The Federal Housing Administration has additional loan options for creative homebuyers as well. The FHA 203kloan is a type of rehabilitation loan that can be used to both purchase and fix up a property. FHA 203k loans involve giving the borrower between two and four disbursements of money when specific improvements are made to the property. To qualify for a 203k FHA loan, you must be living in the property and have the repairs made by a licensed contractor.

FHA loans can be an effective tool in allowing first time homebuyers and repeat homebuyers to get into properties when they cannot qualify for conventional loans. If you have questions about qualifying for FHA loans, talk to your trusted lender or banking institution.

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About Sarah Davis

Sarah Davis is a real estate broker in San Diego, Calif. She enjoys helping both buyers and sellers and was voted one of the top 10 best real estate agents in San Diego in 2013 by Union Tribune readers. In her spare time she talks about real estate on a local radio show and manages her website RealtorSD.com.

Comments

  1. “FHA loans can only be made on owner-occupied properties. ”
    Regarding this statement, I plan on buying a house soon with an FHA loan. Live there for a year then get a lease agreement and rent it out to my mom. Next i want to purchase a house for myself with 20% down payment. Is this possible to do with FHA as my first property?

  2. Hi James, great question. You may not like this but unfortunately, FHA loans are intended only for those who will occupy the property as their primary residence. There may be many people who do get FHA loans, move out and then rent the property out (not sure there is much regulation on that matter). But truly, if you get an FHA loan, you are required to check “owner occupied” on the purchase contract additionally confirm it on the loan docs. Therefore, if for some strange reason the lender did find out that later on you were not living there and you were renting it out, it COULD be considered mortgage fraud. Again, not going to say how likely that is to happen, but just something to be aware of. I personally wouldn’t feel comfortable doing so unless I refinanced into a conventional and then rented it out.

    You’d probably be better off purchasing the 1st house with a conventional, 20% down (if you have the money now), living there for a bit, then renting that out to her and then getting an FHA on the 2nd house for you to live in.

    Let me know if you have any other questions. Hope that helps!

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